4 Ideas to Consider When the Market is Down
Contributed by Drew McMillin CFP®
Director of Financial Planning, Dobyns Wealth Group
“Control what you can control.” This is a phrase that makes a lot of sense on the surface but hard to accomplish, especially when you turn the phrase around to say, “Give up control of what you cannot control.” Many of us struggle with giving up control of certain things in our lives. This is especially true in the investment world. When our account values have gone down, we feel the need to change something. However, as Jeff Dobyns explains here, the time to make changes to your investments is not when the market is down. Rather, it is before the market drops. It is when you create your original plan. It is when you determine your asset allocation based on your long term goals. It is when you originally diversify. Too many investors make emotional decisions when they see their account values drop and they end up “selling low” and potentially hurting their long term returns. Investments are the hardest part of our financial lives to give up control of; however, there are a few great ideas to consider taking advantage of while the market is down.
- Tax Loss Harvesting. This is the process of selling investments within taxable accounts that have dropped in value below their tax cost basis creating an unrealized loss. By realizing these losses, you are able to use the losses to offset future gains, as well as up to $3,000 of additional income each year. Additionally, you are able to carry forward any unused losses to be used in future years. You must not purchase a substantially identical investment within 30 days to avoid the IRS Wash Sale Rule but you can purchase similar investments so that your money continues to be invested. Everyone loves saving money in taxes.
- Roth Conversions. For any pre-tax funds you might have within a Traditional IRA, you can move part or all of these funds to a Roth IRA and pay the taxes due on this conversion in the year you complete it. If you have an account you have wanted to convert but have not pulled the trigger on it, this could be a good time to consider doing it since the account is more than likely worth less now than it was 12 months ago. You will pay less tax but still own the same amount of shares. Once the market rebounds, all of that growth will be tax-free in the Roth IRA, as opposed to tax-deferred in the Traditional IRA.
- Max Out Retirement Accounts Early. For those of you with the cash flow to max out retirement accounts each year, you could consider funding your Roth IRAs with a lump sum earlier in the year while the market is down. This allows you the opportunity to potentially purchase more shares now than you would if you waited to fund the accounts. The same goes for your company retirement plan, such as a 401(k) or 403(b). If you have excess cash to supplement your foregone income that you will be putting into the retirement plan, you can temporarily increase your retirement plan contributions from your paycheck in order to max the plan out earlier in the year while the market is down.
- Revisit Your Financial Plan. Revisiting your long term financial plan can provide confidence that you are still on track, regardless of the market being down, as well as encourage a long term perspective. The market being down is never ideal but good financial planning software factors in these scenarios and can give you the confidence that you can weather this storm without sacrificing your long term income. Additionally, revisiting your plan can provide insight into whether you are taking too much risk within your portfolio and can afford to more conservative.
During these times with the market being down, it is always hard to hear “stay the course” with the investments. Human natures tell us to take action and take control. However, oftentimes, when it comes to prudent investment management, the best plan of action is to take no action. There are several actions to consider though from a financial planning perspective when the market drops. I hope you find these tips helpful.
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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Drew McMilin and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Diversification and asset allocation do not ensure a profit or protect against a loss. Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications.
Investors should consult a tax advisor before deciding to do a conversion. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.